December 29, 2008


Many considerations should be an active part of any investment decision - your investment objectives/goals, comfort level with risk, time horizon, management issues (i.e., fund manager, utilizing a financial planner, etc.), asset allocation, and investment fees/expenses to name a few. This week I want to focus specifically on fees and expenses. [While a 401(k) is the most common type of account, you will find that following principles related to managing fees and expenses will apply to other types of investment accounts as well].

While your investment contributions, rate of return, and time are the primary gauges of your account's future value; the fees and expenses paid by your plan can substantially 'shrink' that value. The Department of Labor provides the following example:

Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent!


ADMINISTRATIVE FEES. The costs of basic administrative services (i.e., accounting, plan record keeping, legal services, etc.) may be borne by different parties: covered by investment fees deducted from investment returns, paid by employer, or charged against the overall assets of the plan. The size of this fee is often correlated with the level of services provided (although note always the case) -- in addition to basic administrative services, some plans may also provide access to customer service reps, educational seminars, software, investment advice, electronic access to plan, online transactions, etc.

INVESTMENT FEES. The heftiest of investment fees are for managing the plan investments. Fees for investment management generally are assessed as a percentage of assets invested. You should always pay close attention to these fees. They will be reflected as an indirect charge against your account (they are deducted directly from your investment returns). Your net total return is your return after these fees have been deducted. Since these fees are not specifically identified on statements, they can go 'unfelt' by investors (out of sight out of mind).

'INDIVIDUAL' SERVICE FEES. Individual service fees are those that are charged separately to those who use particular features. Loan options and brokerage options (ability to purchase stock) are examples of particular features that would be assessed individual service fees.

- Financial sources - Wall Street Journal, Yahoo Finance, Morningstar...
- Plan prospectus (outline of fees associated with investment choices).
- The summary plan description (provided when you join the plan).
- Your account statement.
- Your plan's annual report.

* Keep in mind that law merely requires that fees charged to a 401(k) plan be "reasonable" - there is no specific fee level that is set. If something seems 'unreasonable' to you, contact your plan administrator and let them know.

** By no means am I suggesting that cheaper is necessarily better... rather, fees are one relevant consideration in decision-making. Also, understand that higher cost by no means translates to consistently superior returns.

- A Look at 401(k) Plan Fees
- A Study of 401(k) Plan Fees and Expenses
- Managing Your 401(k): Fee Overview (FINRA)
- Mutual Fund Expense Analyzer

December 22, 2008


Last May I blogged about the proposed credit card changes by the Federal Reserve to crack down on unfair and deceptive card practices. Fortunately for consumers, the rules were passed last week. Unfortunately, the changes won't take effect for another year and a half (July 2010)! You can read my prior blog for a summary of the changes.

Today, I want to write about a growing phenomenon with card companies right now -- closing the cards of inactive accounts. Many people are wondering how this might impact their credit. How [or whether] your credit (score) will be impacted will largely depend upon your 'bigger' credit picture. Questions to ask ...

--> How many credit cards do you currently have? If you have several cards (I will call this more than 4), you have "enough" cards and closing one from that standpoint won't harm your credit. If you have 3 or fewer cards, closing one will lower your credit score. You may want to consider keeping the account open.

--> How long have you had the card? Age of other cards? If you have other [open] card accounts that you have had longer, closing a card with a shorter history will have a minimal impact; if the card being closed is the card you've had for the longest period of time, the impact will be larger as you will in effect be 'shrinking' the age of your credit history.

--> How much [if any] credit card debt do you have? If you pay your balance(s) in full each month, no problem. The higher the level of debt, however, the greater the impact (negatively) to your credit. Suppose you have $2,500 in CC debt and your total credit limits on your cards totals $10,000. Your debt to limit ratio is 25%. If the closed account had a credit limit of $5,000, your debt is obviously the same ($2,500) but your debt to credit limit ratio would now be 50% ($2500/$5000).

As a rule of thumb, if you have a high credit score with a strong mixture of credit, I wouldn't be overly concerned about the impact that a closed credit card account would have. If you want to keep your accounts open and active, the advice of consumer advocates [is said to work with most card companies]... Make at least one purchase every 6 months on the card - amount of purchase does not matter - and your card will be kept in an 'active' status.

December 11, 2008


My inspiration for a tip this week came from an advertisement I saw for a new credit card offering some interesting reward incentives (see Fidelity card below) ... it got me thinking about credit card reward programs in general. The credit cards mentioned represent MY favorite reward card programs. Picking the "best" CC programs is sort of like picking the best cities in the country to live - there will always be room for differences of opinion [there are almost that many to choose from as well!].

The primary criteria I used to guide my decision-making process:
- No annual fee
- Permanent, not "introductory" rewards (i.e., 2X benefits for 6 months)
- Preference given to programs that credit the rewards regularly
- Straightforward program - uncomplicated (i.e., not tier-based, etc.)

BEFORE considering a reward-based credit card, you should be aware...
- Aware of your tendencies; it is easy to spend more when using plastic
- Cash back rewards tend to offer healthier benefits than points do
- CNN Money article on 'the risks of the rewards'
- Interest rates on reward cards tend to be higher than other cards
- Only worth considering if you pay your balance in full monthly
- Scrutinize carefully any offer that is 'up to' some % or amount
- Selection should meet your needs based upon projected card use
- Tools can help you analyze offers based on your spending habits
- Ultimately, ensure the benefits outweigh any associated costs
- USE ACCUMULATED REWARDS! 41% rarely/never use their rewards

Depending on your circumstances, American Express has a couple of potentially strong reward cards. AmEx Clear offers a card with absolutely no fees (no annual fee, late fees, overlimit fees, cash advance fees, or balance transfer fees). I may question the value of a card if you commonly get hit with fees, but if you do and plan to continue using credit, this may be a smart solution. They also provide a free credit score annually. The AmEx Blue doesn't meet my simplicity rule (offers 5% back on some items after the first $6,500 spent each year; 1% on those purchases up to that point -- 1.5% and .5% respectively on "other" items). But, it can be a viable option for those that use their credit card to make most of their purchases.

Capital One is perhaps the most polarizing credit card company on the planet. People with poor credit hate them; most with good credit love them. Here are some of the benefits I like [although not a "traditional" reward card, the rewards are definitely tangible]:
Competitive rates (I got 4.9% F a few years ago; 7.9% is advertised)
No transaction fees on international purchases
Cash advance rate = purchase rate
No fee to transfer balances

This historically has been one of the more popular reward cards (definitely Chase's most popular card); in the past month and a half, they've updated the card. I wouldn't recommend the "new" card by any stretch; if you have the old card with the prior terms, you're ok to keep it.

3% benefit for gas purchases
3% benefit for restaurant purchases
2% benefit for travel purchases
1% benefit for everything else
No limits on rewards
* Need to be Costco member & the benefit is only credited annually

5% benefit for gas purchases (any gas, not specific station)
5% benefit for auto maintenance purchases
5% benefit up to $100/billing period -- $1200/year
1% benefit on other purchases
* With a gas reward card, my preference is a card that provides the same maximum benefit regardless of where the gas is purchased. AAA (membership not required) offers a gas rewards card through Bank of America that provides a 5% benefit on all gas purchases as well.

2% benefit ($50 Fidelity IRA investment for each $2500 in purchases)
2% benefit for 529 college saving plan option is also available
No limits on rewards
* Rewards can be rolled over to the next calendar year if your IRA contribution has been maxed out.

The card our household uses for most purchases is a Countrywide credit card (no longer available). It provides a 2% principal balance credit to our mortgage ($50 applied to our principal for every $2500 in purchases). I mention it to point out that new products are being created constantly that link cards to desirable rewards (i.e., the new Fidelity IRA card). I understand Wells Fargo has a similar mortgage-linked card (although the reward is smaller - 1%).

December 09, 2008


Many consumers have found an unexpected/unwanted surprise when opening their credit card statements this holiday season ... one of the most perplexing changes has been a general raising of interest rates (while other major rates have been dropping). The rationale? "A difficult market environment." Another common change (not as surprising) has been a reduction in credit limits; as you are likely aware, if you carry a balance this [lower credit limit] will negatively impact your credit score as the result will be a higher debt ratio (the proportion of your balance in relation to your credit limit). For many, these "surprises" have come even though no late payments have been made. According to Consumer Action, nearly half of banks now penalize cardholders for changes in their credit history with default rates up to 35%.

This is particularly troubling given that roughly a year and a half ago, Citi and others agreed to ditch this dispicable practice of hiking rates at any time for any reason when they told a Senate panel that they were going to give up that practice. Well, with these 'difficult times' they've changed their mind. Credit card holders are getting squeezed to make up for poor lending decisions made in housing, private student loans, and other areas. The Federal Reserve started pushing last May for new rules that would stop these types of practices as would the proposed Credit Cardholders Bill of Rights that I recently wrote about.

Although credit card companies can currently raise your rate for any reason, results of a recent Consumer Action survey outline the more common 'triggers' of interest rate increases (*the survey analyzed 146 cards from 47 different issuers):

- Credit score gets worse (90.48%)
- Paying mortgage, car loan or other creditor late (85.71%)
- Going over credit limit (57.14%)
- Bouncing a payment check (52.38%)
- Too much debt (42.86%)
- Too much available credit (33.33%)
- Getting a new credit card (33.33%)
- Inquiring about a car loan or mortgage (23.81%)

ADDITIONAL RESOURCES (Prior Financial Tip Blog Posts):
o Credit Card Balance Transfers
o Credit Card Selection
o Credit Card Trap Widens
o Credit Cardholders' Bill of Rights
o Debit Card Realities
o Negotiating a Lower Credit Card Rate
o Proposed Credit Card Changes
o Risk-Based Re-Pricing
o Schumer's Box
o Understanding Your Credit Card Statement

December 01, 2008


Last week, USA Today put forth an article on protecting yourself during this financial crisis. The question - what do you do now with your money? With so many people losing their head right now and reacting irrationally (shifting investments completely to bonds, ceasing 401(k) contributions, cashing out retirement accounts, etc.), keeping your head can be a challenge. Also, what you should be doing depends on a lot of "personal" factors (your time horizon, your tolerance for risk, your debt situation, etc.). The article outlined 'general' recommendations/ thoughts from some leading financial advisers based upon your age ...

- Don't panic. You likely have less to lose (have often just begun investing and have a long time to recover from a downturn).
- As you invest, don't ignore your debt.

- Prioritize retirement savings.
- Don't let fear squander your opportunity to take risk.
- Keep/build an emergency fund (but don't sell stocks to get there).
- Don't hastily temper the storm; make smooth transitions (i.e., make adjustments with new contributions without necessarily selling existing assets).

- Take advantage of these prime earning years to contribute as much as possible into retirement savings; even if it means cutting back on spending.
- Resist the urge to stop contributing!
- Don't abandon the stock market; people currently stashing money in CDs and money market funds "are committing financial suicide." The 1.18% return on an average money market fund won't even keep up with inflation.
- Stay diversified.

- Don't do anything rash.
- Keep saving.
- Don't overlook any potential ways to boost savings.
- Make sure you're not paying too much for your investments (i.e., fund 'loads' and expense ratios -- this is solid advice regardless of age, not sure why it is plugged in as specific advice for this age group).
- Keep in mind that you have longer than 15 years to make up losses even if you retire at age 65.

IF YOU'RE 60+...
- Toughest position given the shorter period of time to recover from losses.
- Adjust expectations.
- Consider putting off social security as long as possible; each year you put off the benefit between age 62 and 70 you increase your payment by 8%.
- Cut back on withdrawals if necessary.
- Work part time.
- Consider an immediate, fixed term annuity.
- Invest for comfort - make decisions you can sleep with at night.

While there are distinct differences in the advice provided to the different age groups, there is a definite theme ... keep your head (don't panic/ overreact), spend less, save more, diversify, stick to your financial game plan. Ironically, it sounds like the same advice you should be getting regardless of the economic climate ...

NOTE. USA Today article.